NPV (Net Present Value)
What is “Net Present Value (NPV)” meaning?
Net Present Value is a financial concept used to evaluate the profitability of an investment or project. It determines whether the expected future returns, adjusted for time and risk, outweigh the initial cost. If the NPV is positive, the investment is typically considered financially worthwhile.
Example
“Our forecast shows the new software tool has an NPV of $40,000, making it a smart investment for the next fiscal year.”
How is “Net Present Value (NPV)” used in business?
In business, NPV is used during financial planning, investment analysis, and budgeting decisions. It's particularly important for startups, project managers, and investors who must assess the long-term value of initiatives. By discounting future earnings, NPV helps ensure decisions are based on real, not inflated, financial expectations.
Pro Tip
Always compare multiple projects using NPV to find the most valuable opportunity. Be sure your discount rate reflects realistic risk and inflation factors.
Related Terms
Internal Rate of Return (IRR), Cash Flow Forecast, Discount Rate, Capital Budgeting
